Journal Article

Comparing The Effectiveness of Employment Subsidies


  • Brown
  • A.J.G.
  • Merkl
  • C.
  • Snower
  • D.J.
Publication Date

This paper examines the implications of employment subsidies for employment, welfare,

and inequality. In particular, it investigates how these effects depend on which groups

these subsidies are targeted at. Our analysis focuses on policies that are "approximately

welfare efficient" (AWE), i.e. policies that that (a) improve employment and welfare, (b)

do not raise earnings inequality and (c) are self-financing. We construct a microfounded,

dynamic model of hiring and separations and calibrate it with German data. The calibration

shows that hiring vouchers can be AWE, while low-wage subsidies are not AWE.

Furthermore, hiring vouchers targeted at the long-term unemployed are more effective

than those targeted at low-ability workers.

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JEL Classification
J23, J24, J38, J64, J68

Key Words

  • Duration
  • employment
  • hiring voucher
  • low wage subsidy
  • self-financing
  • targeting
  • unemployment